Designing toll road concessions - Lessons from Argentina

Privatesector P U B L I C P O L I C Y F O R T H E The World Bank Group December 1996 Note No. 99 Designing Toll Road Concessions— Lessons from Argentina Antonio Estache Before Argentina began concessioning its major tenance, rehabilitation, and capacity improve- and José Carbajo roadways in 1990, it had a mature, well-con- ments. Built into the concessions was a toll struc- nected, but poorly maintained network. Main- ture subject to price cap regulation. It set a tenance had been squeezed by both the shortage uniform value per kilometer for each class of of government funding and the high cost of pub- vehicle and was consistent across all conces- lic sector construction and maintenance—con- sions. The maximum toll was five times the ba- struction costs averaged about twice what might sic toll and was to be determined by vehicle be considered best practice. Thus, when Argen- size, number of axles, and distance traveled tina undertook reform of the roads sector, its between toll booths. To protect concessionaire primary objectives were reconstruction and revenues against inflation, tolls were to be up- maintenance of existing roads and reduction of dated using a formula giving roughly equal the public finance required by the sector. In- weight to the cost of living index, the whole- volving the private sector in exchange for the sale price index, and the value of the U.S. dol- right to charge users tolls was seen as a way to lar. But the government provided no revenue both shift the financial burden to users and main- guarantees to the concessionaires. tain roads more efficiently. The service levels, defined so as to recover past The general privatization strategy was to un- service levels, were measured by an index of bundle viable roads into build-operate-transfer road serviceability (the state of the pavement) (BOT) concessions awarded through competi- ranging from 1 to 10. Targets were set for three tive bidding. Most of the traffic is concentrated periods: during the first three years, the objec- near major nodes, such as Buenos Aires and to tive was to reach an index of about 6.4; in the a lesser extent Rosario and Córdoba. Thus, the following seven-year period, the index was to concession program has so far focused on the improve to 8; and during the last two years of multilane roads and freeways serving these cit- the concession, it could not fall below 7.5. The ies, along with other intercity and major city concessionaires’ obligations included undertak- access roads.1 ing certain investments before starting to col- lect tolls, such as correcting the most serious First wave of concessions— deficiencies in the pavement and in vertical sig- Intercity roads naling, and undertaking other investments dur- ing the term of the concession to achieve the In the first wave of privatization, the govern- serviceability targets. Although the bidding docu- ment concessioned about a third of the inter- ments did not specify the size of the investments city highway system, offering twelve 12-year required to reach the serviceability targets, it concessions in 1989 and awarding them in early was estimated that at least 50 percent of the 1990. The segments had traffic averaging at least network would have to be repaved during the 2,000 to 2,500 vehicles a day, a level consid- first three years, with another full repavement ered viable for private concessions. In return during the remaining nine years of the conces- for the right to collect tolls, the concessionaires sion. The concessionaires were also initially were required to undertake a program of main- obligated to pay a fee (canon) to the state for Private Sector Development Department ▪ Vice Presidency for Finance and Private Sector Development  Designing Toll Road Concessions—Lessons from Argentina FIGURE 1 SELECTED PERFORMANCE INDICATORS FOR INTERCITY CONCESSIONS Vehicles (US$ millions) (Millions) 70 duced by more than 50 percent. To compensate 300 Number of vehicles 60 the concessionaires, the canon was eliminated, 250 50 and the government also granted concession- 200 aires a total annual subsidy of US$57 million. 40 150 Revenue from tolls 30 The subsidy, to be distributed among conces- 100 20 sionaires according to the size of their value 50 10 added tax (VAT) contributions, amounts to a Revenue from subsidies 0 0 shadow toll because VAT contributions are di- 1991 1992 1993 1994 1995 rectly related to traffic levels. The location of Source: The Ministry of Economy of Argentina toll booths and the commitments and sched- ules for road works were also renegotiated. the use of the road infrastructure during the life Second wave of concessions—Access of the concession and to take legal responsibil- roads to Buenos Aires ity for any accidents resulting from poor road conditions. In 1992, the government initiated a second wave of concessions, for the maintenance, The intercity road concessions were awarded operation, and improvement of three strategic in twelve simultaneous bidding contests. The access highways radiating from Buenos Aires. bidding was competitive, with 147 bids sub- A fourth concession with no right to collect mitted. The concessions were awarded to thir- tolls was negotiated with a construction com- teen consortia formed by forty-six private pany that had been building a road under a companies. These thirteen consortia were to public contract for many years. pay canon totaling US$890 million (1990 dol- lars). While the canon was the key criterion in The government, benefiting from its experience the bid selection, there were many other crite- with the intercity concessions, designed simple, ria, including technical qualifications and tim- straightforward concession terms and bidding ing of investment. criteria for the Buenos Aires access roads (table 1). Bidders received a comprehensive conces- The intercity road concessions had been in op- sion contract detailing the amount and sched- eration for only five months in February 1991 ule of required investments, the required service when the government decided to suspend the level, and the risk-sharing arrangements between contracts and renegotiate them. Several devel- the government and the concessionaire. The opments led to this decision. First, indexation contract allocated the bulk of the project risk to increased the basic toll by more than 50 per- the private concessionaire by precluding any rev- cent. Second, many concessionaires started to enue or traffic guarantees or any other guaran- collect tolls before undertaking the required in- tee or financial support from the government. vestments. Third, toll booths were located ei- In addition, the contract assigned to the con- ther at a relatively short distance from one cessionaire the responsibility for risks associ- another or near urban centers in order to cap- ated with pending land expropriations. And it ture suburban trips—lack of access alternatives required the concessionaire to build parallel created captive traffic. These three developments untolled access roads, mainly collector streets. prompted public protest and strong pressure to The bidding criteria were reduced to one vari- reduce the tolls. In addition, the government’s able: the lowest toll offered. emergency decree to peg the new peso made the contracts’ tariff escalation clause illegal. Impact The renegotiations resulted in a major overhaul The results of the concessions so far have been in the design of the concessions. Tolls were re- mixed. All have been hit by the “Tequila effect”  TABLE 1 MAIN FEATURES OF THE CONCESSIONS FOR THE BUENOS AIRES ACCESS ROADS Length Twenty-two years and eight months. Ownership The state retains ownership of the road infrastructure. Operation and maintenance All new construction, rehabilitation, improvement, and maintenance operations are performed by the concessionaire, which is legally responsible for any accident caused by poor road conditions. Pricing The basic toll is bid by the concessionaire and is subject to indexation based on the U.S. con- sumer price index. Investment obligations The concessionaire is obligated to carry out specific works before starting to charge tolls, and other works throughout the life of the concession. At the end of the concession, the concession- aire must transfer the roads in perfect maintenance condition. Financial performance The concessionaire derives revenues from tolls and from commercial exploitation of service areas as authorized by the regulator, Organo de Control de Concesiónes. The government does not guarantee minimum traffic levels and provides no other guarantees. recession that started in early 1995. The conces- lator predicts that it will fall to about 10 percent sions for urban access roads promise to pro- by 1997. And maintenance of the concessioned vide some badly needed increases in urban network is no longer a major drain on govern- highway capacity that the government other- ment budgets—though government subsidies wise might not have built. But achieving all the have increased from US$23 million in 1991 to objectives is taking longer than expected. Con- more than US$65 million in 1996, in part be- struction for two of the four concessions has cause of the government’s reluctance to allow been delayed by legal problems with land ex- toll increases. propriation and with relocation of the people now living in the area needed for the construc- But on the negative side, investment is behind tion. Because of the delay, the concessionaires schedule because the renegotiations reduced the have been unable to start collecting their tolls. concessionaires’ potential returns. Although the The other two concessionaires can collect only intercity concession program estimated that at part of their tolls because not all their facilities least 50 percent of the road network had to be are in place. Moreover, in three of the four con- repaved during the first three years of the con- cessions, only 25 to 60 percent of required in- cessions, actual repaving has fallen short of this vestments have been made; in the fourth, mark. Still unclear, however, is the efficiency of investment was accelerated. construction and maintenance. The government has collected no information to show whether Under the intercity highway concessions, road the private sector is maintaining the roads at a use has more than quadrupled between 1991 lower cost than the public sector did—or whether and 1996—raising toll revenues from almost it is doing better for the same cost. US$60 million in 1991 to a projected US$258 million in 1996. However, most of this increase Lessons occurred before 1995—since then the recession has kept traffic and revenues fairly flat (figure Three main lessons have come out of the re- 1). The maintenance of the intercity highway forms. First, it is important to have simple and system, including the concessioned portions, has transparent criteria for the bidding. In the initial improved significantly. The share of paved roads round for the intercity concessions, the bidders in bad condition declined from about 30 per- had to satisfy a long list of technical and finan- cent in 1989 to 25 percent in 1993, and the regu- cial criteria, all with different weightings. By con-  Designing Toll Road Concessions—Lessons from Argentina trast, bidding for the Buenos Aires access road dent, and it is inadequately organized and concessions used a single criterion, and invest- staffed to effectively supervise the concession- ment obligations were discussed with potential aires. Nor does it require meaningful reporting investors before the bidding documents were by the concessionaires. Similar institutional finalized. Using a single, unambiguous criterion weaknesses occur in supervision of the access not only provides transparency in the award pro- roads. The responsible agency, located in the cess. It also avoids unnecessary complications Secretariat of Public Works, does not collect or resulting from tradeoffs between offers on mul- publish information on a regular basis, and its tiple criteria by competing bids. staff, though very committed, have been nei- ther assigned clear goals nor provided with suf- Second, the rules for renegotiating contracts ficient resources. should be spelled out as early and as clearly as possible. Adequate rules were not issued until Challenges ahead 1995. These new rules specify the conditions under which changes in some aspects of the For future concessions, the challenges are to contracts are allowable. And they recognize the translate efficiency gains by the concessionaires importance to the concessionaire of ensuring into savings for road users and to structure the that renegotiation does not alter its financial contracts so as to provide the right incentives return when the problems that led to the rene- and to ensure flexibility to adapt to new cir- The Note series is an gotiation are beyond its control. There have cumstances. In the current concession schemes, open forum intended to encourage dissemina- been several cases in which such problems it is unclear whether efficiency gains have ben- tion of and debate on have forced the government to renegotiate the efited road users through savings in operating ideas, innovations, and contracts. In one case, pegging the new peso costs or in time. Another challenge is for the best practices for expanding the private to the dollar made the contracts’ tariff escala- DNV’s Organo de Control de Concesiónes, sector. The views tion clauses illegal. Before the new guidelines which now relies on the toll operators for traf- published are those of were adopted, the concessions were renegoti- fic and toll revenue information, to improve its the authors and should not be attributed to the ated bilaterally, with each party seeking the capability to audit the results submitted by the World Bank or any of its best deal it could get. Now, all the allowed concessionaires. This regulatory function will be- affiliated organizations. options and the terms of eligibility are clearly come even more necessary in the future if more Nor do any of the con- clusions represent specified so that all concessionaires are play- flexible contracts are designed that introduce official policy of the ing by the same rules. mechanisms for translating efficiency gains into World Bank or of its lower tolls or for cross-subsidizing the provin- Executive Directors or the countries they Third, institution building must be taken seri- cial roads that have less traffic but act as feed- represent. ously. Before the concessioning, all the main ers to the intercity links. technical functions (planning, design, mainte- To order additional copies please call the nance, construction) for the national highway For more information, see Antonio Estache, F. Helou, and Martin FPD Note line to leave a network were the exclusive responsibility of the Rodriguez-Pardina, “A Portable Description of Argentina’s Transport message (202-458-1111) Dirección Nacional de Vialidad (DNV). The same Privatization and Regulation,” World Bank, Latin America and the or contact Suzanne Caribbean, Country Department I, Washington, D.C., 1995. Smith, editor, Room functions were performed by similar agencies G8105, The World Bank, at the provincial level. Poor coordination among 1 Traffic over the more remote provincial roads is very light and the 1818 H Street, NW, these agencies led to poor planning and ineffi- likelihood of private financing in the near future is slim. The Ar- Washington, D.C. 20433, gentine solution for provincial roads is to seek bids for minimum or Internet address cient decisions. The reform transferred the man- subsidies, though this has yet to be implemented. ssmith7@worldbank.org. agement and control of roads to the provinces. Previous issues are also The DNV was to become a national planning available on-line (http:// Antonio Estache, Latin America and the www.worldbank.org/ and coordinating agency responsible for allo- Caribbean, Country Department I html/fpd/notes/ cating resources and auditing their use for notelist.html). (aestache@worldbank.org), and José Carbajo, national highways while also acting as a regula- European Bank of Reconstruction and 9Printed on recycled tor for these highways. The DNV does not yet Development (carbajo@ebrd10.ebrd.com) paper. fully perform either function. It is not indepen-